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ALERT
November 1, 2016
(Originally January 29, 2007)
SEC STAFF UPDATES INTERPRETIVE
GUIDANCE ON EXECUTIVE AND
DIRECTOR COMPENSATION
DISCLOSURE RULES
The staff of the Securities and Exchange Commission (SEC) periodically updates its interpretive guidance on
executive and director compensation proxy disclosure rules through the release of Compliance & Disclosure
Interpretations (CDIs). The CDIs are drafted in question and answer format for issues of general applicability,
and also in the form of interpretive responses regarding particular situations. The most recent guidance was
released on October 18, 2016. The interpretative guidance is briefly summarized below with the most recent
guidance presented in italics.
Shareholder Advisory Votes on Executive Compensation

The say-on-pay vote resolution may omit the reference to “Item 402 of Regulation S-K” and replace
with a plain-English equivalent, such as “the compensation disclosure rules of the Securities and
Exchange Commission, including the compensation discussion and analysis, the compensation tables
and any related material disclosed in this proxy statement”

The say-when-on-pay vote does not need to be in the form of a resolution

The say-when-on-pay vote may omit the reference to “every 1, 2, or 3 years, or abstain” and replace
with “every year, every other year, or every three years, or abstain”
Compensation Discussion and Analysis

The Compensation Discussion and Analysis (CD&A) disclosure requirements related to stock option
grant timing and exercise price determination are applicable to all types of equity awards (not just stock
options), and may require disclosure of grant practices that occurred before or after the last completed
fiscal year

When evaluating whether performance targets may be omitted from disclosure, companies must first
determine if such disclosure is material to an understanding of compensation paid for the last
completed fiscal year; if not material, no disclosure is required; if material, quantitative performance
targets must be disclosed unless the goals involve confidential trade secrets or commercial or financial
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information, the disclosure of which would result in competitive harm to the company; there is no
requirement to disclose quantitative targets for inherently subjective or qualitative assessments, such
as “demonstrated leadership”

The discussion of performance targets/goals for future fiscal years should be included in the CD&A only
if it enhances the understanding of the named executive officers’ compensation for the last completed
fiscal year

Disclosure of non-GAAP performance goals (and actual performance versus those goals) is not subject
to the general rules regarding disclosure of non-GAAP financial measures, but this exception is limited
solely to disclosure of performance goals and does not apply to disclosure of non-GAAP financial
measures presented elsewhere in the proxy statement

When determining whether a company’s benchmarking practices need to be discussed and analyzed,
“benchmarking” is defined generally as using compensation data about other companies as a reference
point to provide a framework for compensation decisions; benchmarking does not include use of broadbased third-party surveys for more general understanding purposes

If a compensation consultant plays a material role in the company’s compensation-setting practices and
decisions, then discussion and analysis of that role is required in the CD&A (in addition to the required
disclosure of any compensation consultant involvement in the compensation committee governance
disclosures)
Named Executive Officers

Compensation information for fiscal years prior to becoming a named executive officer does not need to
be disclosed

If an individual is a named executive officer for the last completed fiscal year and the third preceding
fiscal year, but not the second preceding fiscal year, compensation information must be disclosed in the
Summary Compensation Table for all three fiscal years

If an individual ceases to be an executive officer during the fiscal year but remains employed by the
company, the employee must be included in the Summary Compensation Table if the employee would
otherwise be one of the two additional individuals whose total compensation for the year (based on the
employee’s compensation for the full year) was higher than the total compensation of the three highest
paid executive officers, other than the chief executive officer and chief financial officer, who are treated
as named executive officers

If an individual served as chief financial officer for part of the last completed fiscal year but was serving
as one of the three most highly compensated officers in a different capacity at year end, the individual
should be included as a named executive officer by reason of being the chief financial officer and not by
reason of being one of the three most highly compensated officers at fiscal year end

Equity compensation from the acquired company that is assumed in an acquisition should not be taken
into consideration when determining named executive officer status for acquired company executives
who become acquirer company executives, and should not be reported in the Summary Compensation
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Table or Grants of Plan-Based Awards Table of the acquirer company; however, such equity
compensation should be reported in the Outstanding Equity Awards at Fiscal Year-End Table and
Options Exercised and Stock Vested Table of the acquirer company
Summary Compensation Table

Death benefits received from a company funded life insurance policy should not be taken into account
when determining whether an executive is a named executive officer, and should not be reported as
compensation in the Summary Compensation Table

If the rules do not specifically limit footnote disclosure to the last completed fiscal year, footnote
disclosure for prior reported years is required only if material to an understanding of compensation for
the last completed fiscal year

Following a merger among operating companies, there is no concept of “successor” compensation;
therefore, the surviving company in the merger need not report compensation paid by predecessor
companies that disappeared in the merger; further, compensation paid by the predecessor companies
need not be counted in determining whether an individual is a named executive officer of the surviving
company; different rules may apply in situations involving an “amalgamation” or combination of
companies, an operating company combination with a “shell” company, or a spinoff

Cash bonuses based on performance criteria that are substantially uncertain and communicated to
participants at the onset of the performance period should be reported in the Nonequity Incentive Plan
Compensation column of the Summary Compensation Table, regardless of the length of the
performance period or whether negative discretion is permissible, and the basis for the use of negative
discretion may need to be disclosed in the CD&A

Discretionary cash bonuses that are not based on any performance criteria should be reported in the
Bonus column of the Summary Compensation Table, including amounts paid in excess of amounts
earned by meeting the performance criteria in a nonequity incentive plan

Cash retention bonuses that are conditioned on future services are not reported in the bonus column
until the fiscal year in which earned

Bonus amounts that are recovered by the company pursuant to a recoupment or clawback policy in a
year subsequent to the year in which the bonus is earned should be reported as an adjustment to the
Bonus Column (d) and Total Column (j) for the year in which the bonus is earned, as opposed to the
year the compensation is recovered, with appropriate footnote disclosure of the amount recovered;
amounts recovered do not affect the named executive officer determination for the year in which the
bonus is recovered

For arrangements in which the named executive officer may elect to receive equity compensation in
lieu of what would otherwise be paid in cash, if the amount of salary or bonus forgone is less than the
value of the equity compensation received, the incremental value of the equity compensation should be
reported in the Stock or Option Awards column of the Summary Compensation Table, as appropriate;
similarly, if the conversion election is embedded in the terms of the equity award such that the award
falls within the scope of FASB ASC Topic 718 (formerly FAS 123R), the value of the equity
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compensation should be reported in the Stock or Option Awards column of the Summary
Compensation Table, as appropriate

The grant of an annual incentive plan award in which there is no right to stock settlement embedded in
the terms of the award should be reported in the Summary Compensation Table and Grants of PlanBased Awards Table as a nonequity incentive plan award, with appropriate footnote disclosure of any
subsequent stock settlement; conversely, the grant of an annual incentive plan award in which there is
a right to elect stock settlement embedded in the terms of the award should be reported in the
Summary Compensation Table and Grants of Plan-Based Awards Table as an equity incentive plan
award if stock settlement is in fact elected and as a nonequity incentive plan award if not so elected

The disclosure of stock or option award valuation assumptions for the last completed fiscal year may be
incorporated by reference to the Grants of Plan-Based Awards Table if the company chooses to report
those assumptions in that table

The grant of a stock or option award that is subsequently forfeited in the same fiscal year should be
taken into consideration when determining named executive officer status and reported in the Summary
Compensation Table and Grants of Plan-Based Awards Table

The grant date fair value of stock or option awards that are subject to time-based vesting conditions
should also exclude the effect of estimated forfeitures, similar to the instructions for performance-based
vesting conditions

The grant date fair value of stock or option awards that are subject to performance conditions is based
on the probable outcome of the performance conditions as of the grant date, even if the actual outcome
of the performance conditions, and therefore the number of shares actually earned, is known by the
time the proxy statement is filed

If a company modifies an outstanding stock or option award to accelerate the vesting of an award that
would otherwise be forfeited absent the acceleration, the incremental fair value of the modified award is
equal to the entire fair value of the modified award because the fair value of the original award prior to
modification is zero as it would not have vested; the entire fair value of the modified award should be
taken into consideration in the year of modification when determining named executive officer status
and reported in the Summary Compensation Table and Grants of Plan-Based Awards Table,
regardless of whether the modification occurs in the same or subsequent year of grant; this treatment
differs from the accounting guidance in FASB ASC Topic 718 which states that modifications that relax
a vesting condition that was not probable of attainment at the modification date result in a final measure
of compensation cost equal to the fair value of the award at the modification date, as opposed to
recognizing the entire fair value of both the original and modified award as required by the guidance
above

If a company grants an equity incentive plan award that provides for negative discretion to comply with
federal tax rules and results in a delayed grant date for accounting purposes, the award should
nevertheless be taken into consideration when determining named executive officer status and reported
in the Summary Compensation Table and Grants of Plan-Based Awards Table for the year in which the
term of the award and performance targets are communicated to the named executive officer and the
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service inception date begins, not the later grant date for accounting purposes; the amount reported in
both tables should be the then-probable outcome of the performance condition(s) as of the service
inception date

The grant of an annual nonequity incentive plan award that is subsequently declined by a named
executive officer should nevertheless be taken into consideration when determining named executive
officer status and reported in the Summary Compensation Table and Grants of Plan-Based Awards
Table, with appropriate disclosure of the compensation declined in the Compensation Discussion and
Analysis and Summary Compensation Table by either a footnote or an adjoining column to the
nonequity incentive plan compensation column; conversely, the decision by a named executive officer
not to accept a discretionary bonus award before it is granted should not be taken into consideration
when determining named executive officer status or reported in the Summary Compensation Table

Companies with multiple pension plans are permitted to aggregate all increases or decreases in the
actuarial present value of accumulated pension benefits before applying the “no negative number”
provisions applicable to the Change in Pension Value column of the Summary Compensation table

If the $10,000 reporting threshold for perquisites is exceeded, each perquisite must be separately
identified by type even if there is no incremental company cost (no reporting is required for perquisites
that are fully reimbursed by the executive)

No disclosure is required for compensatory benefits received from nondiscriminatory Section 423
employee stock purchase plans

No disclosure is required for nondiscriminatory group disability benefits available to all salaried
employees, similar to the exclusion for nondiscriminatory group life, health, hospitalization and medical
reimbursement plans

No disclosure is required for dividends, dividend equivalents, or other earnings on equity awards
granted prior to the effective date of the new disclosure rules if the earnings would have been
appropriately factored into the grant date fair value of the related award in accordance with FASB ASC
Topic 718

Nonqualified deferred compensation payouts are not disclosed in the Summary Compensation Table,
but rather in the Aggregate Withdrawals/Distributions column of the Nonqualified Deferred
Compensation table

Tax gross-up payments should be reported in the Summary Compensation Table for the same year as
the related perquisites or other compensation is disclosed, and not in the year actually paid (if later)

For amounts paid or accrued in connection with termination of employment or change in control, an
amount is accrued and should be disclosed if all performance necessary to earn the amount is
complete. Conversely, an amount is not accrued (and thus should not be disclosed) if future
performance or compliance with a restrictive covenant is required for payment to become due. For
example, if a named executive officer has completed all performance to earn an amount, but the
payment is subject to deferral, the amount is considered earned and should be disclosed. Conversely, if
an amount would be payable in the future subject to the named executive officer’s cooperation or
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compliance with a non-compete, the amount is not reportable because future performance is required.
Notwithstanding the above, future amounts payable that are not required to be reported in the
Summary Compensation Table should be disclosed in the Potential Payments upon Termination or
Change in Control section.
Grants of Plan-Based Awards Table

If an equity incentive plan award is denominated in dollars, but payable in stock, it should be reported in
columns (f) through (h) of the Grants of Plan-Based Awards Table with footnote disclosure explaining
the stock payout provisions; companies are permitted to change the (#) to ($) in the column headers if
all awards in the column are structured that way

For cash awards that are made in the same year they were earned under an annual nonequity
incentive plan (and the amounts are disclosed in the Summary Compensation Table), companies are
permitted to change “future” to “possible” in the header for columns (c) through (e) of the Grants of
Plan-Based Awards Table

Disclosure is required for “reload” stock options, as well as for stock and option awards of a parent or
subsidiary company

The grant date fair value reported in column (l) of the Grants of Plan-Based Awards Table for equity
incentive plan awards, such as performance shares, should (1) include all tranches of an award for
which performance targets are established at the start of the performance period, (2) exclude all
tranches of an award for which performance targets are established in subsequent fiscal years, and (3)
include any incremental value from amended or modified awards
Outstanding Equity Awards at Fiscal Year-End Table

Dividends or dividend equivalents paid on restricted stock that are credited and reinvested into
additional equity awards should be reported in the Outstanding Equity Awards at Fiscal Year-End Table
while unvested, and in the Option Exercises and Stock Vested Table upon vesting

Shares acquired upon option exercise that are subject to a company repurchase obligation (at the
exercise price) are reported in columns (g) and (h) of the Outstanding Equity Awards at Fiscal YearEnd Table until the repurchase obligation lapses, at which time such shares are reported in columns (d)
and (e) of the Option Exercises and Stock Vested Table

Equity incentive plan awards reported in columns (d), (i), or (j) of the Outstanding Equity Awards at
Fiscal Year-End Table are based on achievement of threshold performance, except that if cumulative
performance to date as of the last completed fiscal year exceeds threshold, the next higher level of
performance (that is, either target or maximum) should be reported

Equity incentive plan awards that are earned as of the last completed fiscal year end but paid in
restricted stock should be reported in columns (g) and (h) rather than (i) and (j) of the Outstanding
Awards at Fiscal Year-End Table, based on the actual number of equity incentive plan awards earned
(even if the actual number of shares earned is determined after fiscal year end)
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
It is permissible to add a grant date column to the table and a related footnote detailing the vesting
schedule that relates to that grant, provided that if a different vesting schedule applies to any award the
table must include disclosure about that vesting schedule
Option Exercises and Stock Vested Table

The gross number of shares underlying an exercised stock appreciation right should be reported in the
Option Exercises and Stock Vested Table, not just the net profit shares

Shares acquired upon option exercise that are subject to a company repurchase obligation (at the
exercise price) should not be reported as option exercises in columns (b) or (c) of the Option Exercises
and Stock Vested Table, but rather in columns (d) and (e) of the Option Exercise and Stock Vested
Table as vested stock when the repurchase obligation lapses
Pension Benefits Table

When a pension plan has a stated “normal” retirement age and an early retirement age at which
benefits are paid without any reduction, the early retirement age should be used for determining
pension benefits (and the normal age may be included as an additional column)

The actuarial present value of accumulated pension benefits that vest upon reaching a certain age
should assume that the normal retirement age (or early retirement age, if applicable) is attained, and
should ignore actuarial “preretirement decrements”

The present value of accumulated benefits for a cash balance pension plan is the actuarial present
value of the accumulated benefits under the plan, not simply the accrued benefits
Nonqualified Deferred Compensation Table

Earnings on nonqualified deferred compensation are not “above-market” or “preferential” if calculated in
the same manner and rate as earnings on externally managed investments for employees participating
in a broad-based, tax-qualified plan (this position may not be available for supplemental retirement
plans that do not have any relationship to a tax-qualified retirement plan of the employer)

Earnings include dividends, stock price appreciation or depreciation, and other similar items, and
should encompass any increase or decrease in the account balance during the last completed fiscal
year that is not attributable to contributions, withdrawals, or distributions during the year

Footnote disclosure of amounts reported in the Nonqualified Deferred Compensation Table that were
previously reported in the Summary Compensation Table is only required if such amounts were actually
previously reported in the Summary Compensation Table

Company contributions should include all contributions earned during the last completed fiscal year,
even if actually credited to the executive’s account in the following year

Disclosure is required on a plan-by-plan basis for all nonqualified deferred compensation and defined
contribution plans, including volitional and mandatory deferrals of vested equity awards
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Potential Payments upon Termination or Change in Control

Companies are to describe and quantify the estimated payments and benefits upon each potential
triggering event, except that if a triggering event has actually occurred, disclosure is only required for
that specific triggering event (even if such event occurs after the end of the last completed fiscal year
but before the proxy statement is filed)

Where the vesting of outstanding stock options is accelerated, companies are to report the “spread”
between the exercise (if any) and the closing market price as of fiscal year end to calculate the value of
the awards (even if the acceleration is pursuant to a broad-based equity compensation program)

For purposes of quantifying any excise tax gross up payments, companies may not substitute the first
day of the following fiscal year for the last business day of the last completed fiscal year
Director Compensation Table

Director compensation disclosure is required for persons who served as director during the last
completed fiscal year but no longer serve as director at year end, or are not standing for re-election the
next year

Director or executive compensation disclosure is not required for an executive officer (who is not a
named executive officer) who is also a director and does not receive additional compensation for
services as a director (footnote disclosure of this fact is required)

Companies are to provide footnote disclosure for each director of the grant date fair value of each
equity award granted during the last completed fiscal year computed in accordance with FASB ASC
TOPIC 718 (including the incremental fair value of repriced or materially modified option awards), and
the aggregate number of nonvested stock and unexercised option awards outstanding at fiscal year
end

Charitable matching gift programs must be disclosed in the All Other Compensation column of the
Director Compensation Table, even where they do not discriminate in favor of officers or directors
Compensation Consultant Fee Disclosure

For purposes of the executive compensation consultant fee disclosure rules, there is no limitation on
the types of services that are included in the definition of “additional services,” and such services can
include services to executives as well as nonexecutives and revenue from the sale of products to the
company; if disclosure is required and the consultant provides services involving broad-based
nondiscriminatory plans or the provision of noncustomized survey information, the classification of such
services as executive/director or additional consulting services depends on whether the
executives/directors benefit from such services under the facts and circumstances; by their terms,
related services for benefits administration, human resources services, actuarial services, merger
integration services, and noncustomized survey information for nonexecutive/director compensation are
classified as additional services
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Compensation Policies and Practices as they Relate to Risk Management

If a company elects or is required to provide narrative disclosure in regard to compensation policies and
practices as they relate to risk management, such disclosure should be included with the company’s
other executive/director compensation proxy disclosures and not located or presented in a manner that
obscures it
Golden Parachute Compensation

For purposes of the golden parachute compensation disclosures required in connection with a change
in control transaction, the named executive officers are those reported in the Summary Compensation
Table for the last completed fiscal year, as well as any chief executive officer and chief financial officer
that served subsequent to the last completed fiscal year (but excluding other executives not employed
at the end of the last completed fiscal year)
CEO Pay Ratio Disclosure

When identifying the median employee, companies are permitted to use any measure of annual total
compensation that is consistently applied and reasonably reflects the annual total compensation of
employees; consistently applied compensation measures could include cash compensation in certain
circumstances or tax/payroll records, but not hourly or annual rates of pay without taking into account
the number of hours actually worked; it is not expected that the consistently applied compensation
measure would necessarily identify the same median employee as if annual total compensation were
used

Companies are not required to use a pay period that includes the date on which the employee
population is determined, nor are they required to use a full annual pay period; companies are
permitted to use a consistently applied compensation measure from the prior fiscal year provided there
has not been a material change in employee population or compensation arrangements

The term employee does not include leased workers working under an agreement specifying a
minimum level of compensation, or independent contractors whose compensation is determined by the
independent contractor or another unaffiliated third party

Companies are permitted to annualize compensation for permanent full-time or part-time employees
who were employed for less than the full fiscal year, such as newly hired employees or employees on
leave of absence; companies are not permitted to annualize compensation for temporary or seasonal
employees, or make a full-time equivalent adjustment for any employee; companies must determine
whether furloughed workers should be included as employees based on the facts and circumstances
Finally, there is additional guidance in the interpretive responses regarding particular situations that deal with
spinoffs, mergers, public offerings, changes in fiscal year end, and parent/subsidiary relationships.
******
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General questions about this summary can be addressed to Thomas M. Haines in our Chicago office at 312332-0910 or by email at [email protected]. Specific questions should be referred to the company’s
professional accountants. Copies of this summary and other published materials are available on our website
at www.fwcook.com.
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